ETFs ruling the roost in emerging markets

ETFs ruling the roost in emerging markets

The abiding rise of exchange-traded funds continues with BlackRock Inc.’s announcement that its primary ETF for emerging-market debt now exceeds the largest mutual fund in the category.

Valued at close to US$7 billion, the size of the fund means that ETFs are now the most popular choice for bonds and stocks in these markets.

The popularity of ETFs among the investment community in Canada and most of the Western world is well established, and now it’s clear that trend is really taking hold in developing nations, too.

Traditionally the allure for investors looking at emerging markets was to find lesser-known companies with the potential to provide large returns. As it stands now, however, 94 per cent of funds that invest in emerging-market debt have trailed their benchmark over the past five years, according to S&P Dow Jones Indices.

As per Bloomberg, Matthew Tucker, head of iShares Americas fixed income strategy at BlackRock revealed the conditions that have fueled the growth of ETFs in these markets.

“In an environment when yield is generally low and when fees can eat into a lot of investors’ return, a lot of investors are favoring lower-cost products.”

In addition, assets in emerging markets have shown a solid recovery recently. Following three years of lows, dollar-denominated bonds have risen close to 8 per cent this year as oil prices have recovered, China’s economy has stabilized and the value of the US dollar has decreased.

The result has been a real boost for ETFs, including BlackRock’s iShares JPMorgan USD Emerging Markets Bond ETF, which invests in dollar debt issued by developing nations. At the start of this week, the fund’s assets had grown to almost $7 billion, a significant increase on the $4.6 billion it reached at end of 2015. The BlackRock ETF overtook the Pictet Global Emerging Debt Fund and the Stone Harbor Emerging Markets Local Currency Debt Fund, which both held the top spot for emerging markets over the past year.